Consumer Markets deals insights

Q3 2019

Coming off a particularly strong run for mergers and acquisitions activity in Consumer Markets during much of 2018, the third quarter of 2019 was noticeably quieter than the same period last year. The volume of transactions (165 deals) fell 10.8% from 185 deals in Q3 2018, while deal value (CA$10.5 billion) was down 40.1% from the CA$17.5 billion in the same period last year. It’s important to note that Q3 2018 featured three significant transactions (involving Farm Boy Co. Inc., Aeroplan and Enercare Inc.) that accounted for more than CA$7 billion of the deal value.

Helping to prevent an even bigger decline in deal value in Q3 2019 was a mega deal—valued at $CA5.3 billion—in which Hasbro Inc. bought Entertainment One Ltd. Deal activity was also down in comparison to Q2 2019. The volume of transactions fell 15.9% from 196 deals, while deal value declined 7% from CA$11.3 billion in the previous quarter.

One area that was noticeably slower for deal activity in Q3 2019 was the cannabis sector. Deal volume and value (54 deals valued at CA$2.6 billion) were down 41.3% and 55.7%, respectively, in comparison to Q2 2019. 

The reduced overall deal activity reflects a slowdown in the private equity space as well. Looking at the private equity subset, there were just 17 deals valued at CA$31.4 million in Q3 2019, versus 22 transactions worth CA$88.5 million in Q2 2019. 

Looking at the economic landscape more broadly, Q3 2019 featured a number of factors that have dampened business sentiment, notably ongoing trade wars and geopolitical uncertainties involving Canada’s top trading partners: the United States, China, and the United Kingdom. Amid speculation about when the next recession will occur, businesses are watching carefully for signs of a downturn while the Bank of Canada is treading a fine line on monetary policy as it seeks to maintain economic momentum while addressing concerns about high consumer debt levels.

While strong population and income growth will continue to drive demand for housing and related goods and services, high debt burdens mean households can only do so much to keep the economy humming, which could have an impact on areas like the retail and automotive sectors. Even so, Consumer Markets companies have continued efforts to position themselves for growth. Amid the uncertainty, what are some of the major trends running across or affecting companies in the sector?

Improving customer experience on the back end

Moving away from the flashiness of storefront customer experience, some companies are investing in creating stronger and more stable and reliable back-end systems.

IKEA for example, announced a customer distribution centre in Kleinburg, Ontario. The facility, which will operate in partnership with DHL, will help IKEA make sure it has the right products available at the right time for customers while improving last-mile delivery in the Greater Toronto Area and reducing lead times and costs. The company says the facility, which is in addition to its distribution centre in Mississauga, Ont., has capacity to accommodate future growth.

Other organizations investing in this area include Shopify Inc., which announced its acquisition of warehouse fulfillment and automation company 6 River Systems Inc. in Q3 2019. The CA$450-million acquisition builds on the announcement by Shopify in June 2019 of the Shopify Fulfillment Network, which gives merchants an option to store, pack and ship their products at competitive rates.

In September, Giant Tiger Stores Ltd. announced a partnership with Mercatus, an e-commerce company, to introduce a new mobile app. Mercatus will maintain the app and also function as Giant Tiger’s mobile solution provider. The announcement came as Giant Tiger announced a new loyalty program, which features weekly deals, contests and sweepstakes, that will run on its app, GT VIP.

These organizations are just some of the companies that are investing in their back-end operations. For example, Hudson’s Bay Co. Chief Executive Officer Helena Foulkes spoke recently of the company’s efforts to enhance its e-commerce business by improving online inventory assortment, site speed, order processing and checkout, fulfillment and delivery timelines. The effort comes as the company continues its work on a broader transformation. So far, HBC has discontinued more than 300 unproductive brands, while adding 100 new and emerging brands as it looks to renew and elevate its product assortment.

In other moves, Loblaw Cos. Ltd. is doubling down on using data and analytics and incorporating the findings into business decisions. While companies tend to focus on developing their data and analytics capabilities internally, acquisitions are another important option available to them that may lead to further deals activity in the coming quarters.

Doing the right thing

With their important presence in consumers’ lives, many Consumer Markets companies are ramping up their social stewardship efforts by taking action on issues like gun violence, plastic waste, gender discrimination and climate change. Canadian companies taking a proactive approach in Q3 2019 include Mountain Equipment Co-op, Lush and Lululemon. They either closed stores or gave the employees flexibility to participate in the global climate change rallies that took place in September 2019. Also on the environmental front, Kentucky Fried Chicken Canada Co. announced in Q3 2019 that it would stop using or giving out plastic straws and bags at its restaurants by October 2019.

Adding to the impetus to be proactive are pressures from the investment community. While climate change continues to be the biggest concern for investors using environmental, social and governance criteria, investment professionals around the world have shown rising concern over poor disclosure and a lack of standardized data on social issues related to supply chains and labour standards.

In Q3 2019, for example, a coalition of investors with more than US$14 trillion in assets under management called for some of the world's biggest companies to release better data on how they manage their staff and workers in their supply chains. Walmart, Novartis and Coca-Cola are among the 750 companies called out by the group of investors backing the initiative. In a letter sent to the companies, the signatories asked for more standardized data on issues like health and safety, workers' rights, diversity and wage levels.

Impacts on real estate

In further evidence of the impacts of shifts in the retail sector on real estate, Q3 2019 saw a rising focus in the property market on industrial real estate investment trusts (REITs).

With retailers looking to be as close to their customers as possible so they can offer swift deliveries and better manage their supply chains, the demand for suburban warehouse facilities is picking up. According to CBRE, the trend has helped to reduce the national industrial vacancy rate to just 3.1%. For investors, that’s helping to make industrial REITs an increasingly attractive investment prospect.

The retail transformation is also having an impact on another area of the property market: residential real estate. In Toronto, plans are underway to add residential condos to several major retail properties, including at Yorkdale Mall. While most of the projects are at the early stages, demographic changes and consumer shifts—notably the desire for spaces offering live-work-play options—suggest the retail-residential combination is a long-term trend.

Uncertainty around cannabis and vaping

Adding to the trade and geopolitical challenges that have plagued the Consumer Markets arena for some time was the emergence in Q3 2019 of regulatory uncertainty related to cannabis and vaping products amid rising health concerns.

With regulators looking at potential new rules and stricter enforcement measures related to vaping products, larger global players are more likely to watch the developments in the sector from the sidelines to avoid the potential financial and reputational risks of making an investment in the current environment. Some investors have already been grappling with challenges in their cannabis investments, with Constellation Brands Inc. feeling the impact of the difficulties faced by Canopy Growth Corp., which has seen its market capitalization dip to CA$10.6 billion as of September 30, 2019, from CA$23.5 billion on May 1. Adding to the uncertainties for the cannabis industry are the challenges faced CannTrust Inc., which has faced a number of difficulties since announcing at the beginning of Q3 2019 that it would halt all sales pending a regulatory investigation.
 

One alternative to making large direct investments are research partnerships, an option Budweiser owner Anheuser-Busch InBev has pursued with Canadian cannabis grower Tilray. Taking a different approach is Canada’s Alimentation Couche-Tard Inc., which has signalled its intent to be one of the key players in the North American cannabis market. The company has already started selling cannabidiol (CBD) products and, in Q3 2019, forged ahead with its ambitions with a CA$26-million investment in cannabis retailer Fire & Flower Holdings Corp.
 

Consumer Markets quarterly deals insights

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Michelle Pickett

Michelle Pickett

Deals Lead Partner, TMT & Consumer Markets, PwC Canada

Tel: +1 416 815 5002

Brooke Valentine

Brooke Valentine

Partner, PwC Canada

Tel: +1 416 687 8141

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